Treasury yields climb to 4-month high on waning stimulus view

March 14 (Bloomberg) -- Treasuries dropped, pushing 10-year note yields to the highest level since October, a day after the Federal Reserve raised its assessment of the U.S. economy and sapped demand for the safety of government debt.

The benchmark 10-year note fell for a sixth straight day in the longest run of declines since October on a reduced likelihood of a third round of debt purchases by the central bank under quantitative easing. A gauge of investor expectations for inflation climbed to the highest in seven months. Thirty- year bonds dropped before a $13 billion sale of the debt.

“QE3 doesn’t seem to be coming down the pike any time soon,” said Larry Milstein, managing director in New York of government and agency debt trading at R.W. Pressprich & Co., a fixed-income broker and dealer for institutional investors. “It was clearly a more hawkish statement than most had anticipated, which is why we broke though the 2.10 percent level. It looks like 2.25 percent is the next level.”

Yields on 10-year notes increased 10 basis points, or 0.10 percentage point, to 2.23 percent at 10:35 a.m. New York time, according to Bloomberg Bond Trader prices. The 2 percent securities maturing in February 2022 fell 7/8, or $8.75 per $1,000 face amount, to 98.

Ten- and 30-year yields rose past their 200-day moving averages for the first time since July. Ten-year note yields touched 2.25 percent, the highest level since Oct. 31, after trading between 1.79 percent and 2.09 percent this year until yesterday. Thirty-year bond yields climbed as much as 11 basis points to 3.38 percent, also the most in more than four months.

Yield Gap Widens

The gap in yields between 30- and two-year securities increased to 299 basis points, the most since October. Two-year yields were little changed at 0.35 percent.

Volatility rose from the lowest level in more than four years. Bank of America Merrill Lynch’s MOVE index, which measures price swings based on options, increased yesterday to 73.8 basis points, up from the previous day’s 69.9 basis points, the least since July 2007. The gauge rose as high as 117.8 on Aug. 8. The reading means traders expect a yield range of 73.8 basis points on an annualized basis in the next month.

Valuation measures show government debt is becoming less expensive. The term premium, a model created by economists at the Fed, was negative 0.44 percent today, the least since October. The figure touched negative 0.79 percent on Feb. 2, the most expensive ever, and compares with the average of positive 0.56 percent over the past decade. A negative reading indicates investors are willing to accept yields below what’s considered fair value.

Volume Increases

Treasury market volume rose yesterday to the highest since Feb. 29 amid the Fed’s assessment of the economy. About $339 billion of Treasuries changed hands through ICAP Plc, the world’s largest interdealer broker, compared with the one-year average of $268 billion.

Investors should sell 10-year Treasury futures as economic conditions “continue to gradually improve,” according to Goldman Sachs Group Inc.

Futures expiring in June may fall to 126 from an entry point of 129 17/32, Francesco Garzarelli, co-head of fixed- income strategy in London, wrote today in an e-mailed report. Investors should end the trade should the securities close above 131 1/2, he said.

The Fed refrained yesterday from new moves to cut borrowing costs, saying the U.S. labor market is gaining strength.

“The unemployment rate has declined notably in recent months but remains elevated,” the Federal Open Market Committee said in a statement at the conclusion of a meeting. It also said “strains in global financial markets have eased, though they continue to pose significant downside risks to the economic outlook.”